ACC Ethics - Chapter 5 Questions

Items to address in audit committee communication dealing with going-concern issues include:

-Whether the substantial doubt has been resolved -Management's plans for dealing with the conditions

The Tyco Board of Directors violated the corporate governance system by:

-borrowing money from the company -doing business with the company -not disclosing related-party relationships

The auditor obtains information about related party transactions

-from the audit committee -from management -by understanding the business purpose of such transactions -by understanding the nature of such transactions

To ensure that the statements are fairly presented, the financial reporting framework:

-is used to determine measurement and recognition of material items in financial statements -requires compliance with relevant laws or regulations

According to SOX and the board's rules, PCAOB enforcement proceedings are:

-public if the board has imposed sanctions and the appeal time has expired -nonpublic unless the parties consent to a public hearing

Relative to an engagement quality review

-the reviewer must maintain independence -the reviewer must evaluate the overall conclusion of the engagement team -the reviewer must evaluate judgements made by the engagement team

Materiality in the context of the audit refers to

Auditor judgement of the needs of users in relation to financial statement information

In which of the following is more skeptical judgement demonstrated?

Auditors with higher levels of trait skepticism and lower levels of trust

Which of the following must be considered when considering materiality in financial statements?

Both quantitative and qualitative factors

Auditors render an _______ opinion on the conformity of the financial statements with _______.

Independent / GAAP

Match each condition for fraud with the proper example: Opportunity

Ineffective internal controls

Match the opinion with the criteria: Disclaimer

Insufficiency of audit evidence

Audit committee communications should include critical accounting polices and practices and critical accounting _____.

estimates

An auditor's responsibility for detecting direct and material effect violations in the statements is ______ than responsibility to detect indirect effect items.

greater

Professional skepticism

is evidenced through audit documentation as it provides evidence of following GAAS

Reasonable assurance in an audit

is not an absolute guarantee that the financial statements are free of material misstatement

Under AS No. 15, the appropriateness of the quality of audit evidence is based on its _____ and _____.

relevance and reliability

Why is it important that auditor's communicate information about accounting estimates to those in charge of governance?

-Accounting estimates involve subjectivity and assumptions. -Future events can affect accounting estimates in a significant way -Accounting estimates can be highly significant to the financial statements

What should be included in management representations?

-Affirmation that management has performed an assessment of the internal controls -Disclosure of any deficiencies in internal controls -Confirmation of providing auditor access to relevant information

Rationalizations given for fraud include:

-Aggressive accounting is acceptable -Keep the stock price high -It is a temporary fix

As stated in the audit report, the auditor's responsibilities include:

-An overview of judgements made and conclusions reached -Express an opinion on the financial statements -Conduct an audit in accordance with GAAS -An overview of how the audit was performed

Auditors should withdraw from the engagement when:

-Auditor decide management cannot be trusted -Significant conflict exists with management

Which of the following matters related to the auditor's report should be communicated by the auditor to the audit committee?

-Auditor expects to modify the opinion -Reasons for expected opinion modification -Reasons for including any explanatory paragraphs

How can a risk management culture be improved?

-Commitment to integrity and ethical values -Senior management and the board should adopt internal control and ERM procedures

Which management attitudinal risk factors indicate fraudulent financial reporting may exist?

-Committing to overly aggressive financial analysts' earnings estimates -Excessive interest by management in increasing share prices and earnings -Lack of support or enforcement of entity ethical standards -Management's unwillingness to correct significant problems with internal controls

The matters that the auditor should communicate to the audit committee that deal with the quality of the company's financial reporting include:

-Concerns identified regarding management's anticipated application of accounting pronouncements issued but not yet effective -Whether the financial statement presentation and notes are in conformity with the applicable financial reporting framework

Which of the following procedures should be performed by the audit committee to assess the potential for management override of controls?

-Discussions with internal auditors -Solicit the auditor's opinion regarding appropriateness of journal entries -Compare reported information to forecasts and industry averages

How can ineffective monitoring of management create the opportunity for fraud?

-Domination of management by one person -Ineffective oversight of the financial reporting process -Ineffective oversight of the internal controls

What is the purpose of internal controls in the ERM framework?

-Enhance corporate governance -Improve risk management

How should an auditor meet the reasonable person standard?

-Ensure that the appearance of independence exists -Exercise a level of care to avoid charges of negligence

What should an auditor do upon discovering an illegal act?

-Ensure that the audit committee has been informed -Assess its effects on the financial statements

An opportunity for fraud to occur exists because of:

-Estimates and judgements that are subjective -Significant related-party transactions -Unusual and complex transactions

Audit committee communications about *difficulties encountered during the audit* include:

-Extensive effort required to obtain adequate audit evidence -Significant delays by management in providing needed audit evidence -Unreasonable restrictions placed by management during the audit -Reluctance of management to provide going concern assessments when requested

Which of the following were among audit deficiencies found by the Center for Audit Quality?

-Failure to express appropriate audit opinion -Failure to exercise due care -Insufficient level of professional skepticism

The standards applicable to an audit of ICFR under AS No. 5 include:

-General standards -Fieldwork standards -Reporting standards (GAAP and Certification standards NOT included)

Emphasis of matter issues that might be addressed in the audit report include:

-Going concern -Outstanding litigation -Subsequent events

COSO's analysis of financial statement fraud indicates that:

-Improper revenue recognition was one of the most common frauds -A higher percentage of auditor replacement occurs in firms with fraud -Top management was frequently involved in the fraud

Which financial or profitability risk factors might motivate fraud?

-Inability to generate cash flows -Recurring operating losses

Which of the following were reasons for PwC's SEC sanction related to Satyam?

-Lack of due care -Failure to report material illegal acts -Insufficient level of professional skepticism

Audit deficiencies identified by PCAOB in their inspections of Big 4 firms include:

-Lack of professional care -Failure to obtain sufficient audit evidence -Lack of professional skepticism

Which of the following are ways to document professional skepticism?

-Maintain a record of discussions with management -Document alternative views and judgement made -Document challenges to management's views

The ERM framework includes

-Manage multiple enterprise risks -Enhance risk response decisions -Aligning risk appetite and strategy

Fraud includes:

-Material Misstatements in the financial statements -Misappropriation of assets

Professional skepticism and judgement

-May be subject to outside pressures during the audit. -Are fostered by personality traits of the individual auditor. -Are influenced by the organizational culture.

Which of the following techniques can lead to fraud?

-Misapplication of GAAP to statement items -Misrepresentation of a material item in the statements -Deception in the financial statements

Each of the following has a role to play in developing financial statement form and content requirements:

-NASDAQ -PCAOB -NYSE -SEC

Audit procedures selected are designed to:

-Obtain evidential matter -Support auditor judgements -Evaluate the reasonableness of significant estimates -Satisfy risk assessment concerns

Which of the following are objectives when performing an integrated audit?

-Obtain sufficient evidence to support the auditor's control risk assessments for audit of financial statements. -Obtain sufficient evidence to support the auditor's opinion on ICFR at year-end.

The audit report states that management's responsibilities include:

-Preparation and fair presentation of the statements in accordance with GAAP -Absence of material misstatements, whether due to error or fraud -Design, implementation, and maintenance of internal controls

The application of GAAP to the statements can lead to mistakes in:

-Presentation -Amounts -Classifications

Under AS No. 14, auditors should include the following in their evaluations of audit results:

-Presentation of the financial statements -Identified risk assessment issues -Results of analytical procedures -How misstatements identified have been dealt with by management

Which of the following should the auditor communicate to the audit committee?

-Related party transactions that lack of a business purpose -Evidence obtained to support management's assertions about related party transactions -The discovery of related party transactions that were undisclosed to the auditor

Auditors have obligations to report illegal acts to parties external to the client when:

-Required by law -Client reports an auditor change to the SEC -Successor auditor makes inquiries in accordance with the engagement agreement

Conditions that impose additional reporting requirements under the PSLRA include:

-Senior management and the board have not taken appropriate action -Illegal act has a material effect on the financial statements

What is the goal of the audit committee's evaluation of fraud risk and management's oversight responsibilities?

-Serve as a deterrent to senior management engaging in fraud -Ensure that management fulfills its responsibilities

In consideration of related party transactions, the auditor

-Should express a qualified or adverse opinion if unable to obtain sufficient evidence to support management's assertion -Should express an unqualified opinion if management modifies the disclosure of related party transactions in accordance with GAAP -must obtain sufficient evidence to support management's assertion that transactions were conducted at arm's-length.

Audit committee communications should address the following matters:

-Significant unusual transactions -Critical accounting estimates -Critical accounting policies and practices -Significant accounting policies and practices

The auditor's assessment of fair presentation includes whether the:

-Statements reflect transactions and events within reasonable limits -Accounting principles used comply with GAAP -Statements and notes are informative of matters that may affect user understanding of the statements

Audit evidence consists of information:

-Supporting management's assertions regarding the financial statements -Corroborating management's assertions regarding the audit report

The introductory paragraph of the audit report includes:

-The name of the entity -The financial statements audited -The period covered by the statements

Concerns of the public about the expectation gap include:

-The public believes the statements provide absolute assurance, not reasonable assurance -The public holds auditors to a higher level of accountability -The disconnect between what the public and users of statements perceive as auditor responsibilities and the view of the profession

Auditors are responsible for detecting illegal acts when:

-They have direct effects on financial statement amounts -They have material effects on financial statement amounts

When risks of material misstatements due to fraud exist, which of the following audit procedures can be used to demonstrate professional skepticism?

-Using specialists -Examine documents from an independent source -Analytical procedures -Third-party confirmations (Communications with the audit committee cannot replace probing questions of management and targeted evidence)

The ERM framework attempts to

Assist management to evaluate and improve the enterprise risk management system

Internal controls and ERM systems can be strengthened by

Changing the culture of the organization

Which of the following is true regarding the dispute between the PCAOB and Chinese authorities?

Chinese law forbids companies from giving documents to the SEC

Which ethical obligation of the auditor is waived if the client does not follow proper reporting procedures for an illegal act?

Confidentiality

How does an auditor gather and objectively evaluate audit evidence?

Consider competency and sufficiency of the evidence

What is the purpose of assessing audit risk and materiality?

Determine nature, timing, and extent of auditing procedures

Due care requires

Diligence and competence

The ethical standard that typically drives fraud is

Egoism

Which of the following provides a picture of how the audit was conducted and the auditing firm's quality control procedures?

Engagement Quality Review

Misappropriation of assets can be reduced by:

Establishing internal controls to safeguard assets

Which estimates should be communicated to the audit committee in addition to critical accounting estimates?

Estimates with a high degree of subjectivity

Audit committee responsibilities for fraud risk assessment include:

Evaluate management's role in detecting and preventing fraud

The disconnect between the actual role of the external auditor in detecting fraud and the public expectation of the external auditor to detect fraud is referred to as __________.

Expectations gap

The opinion section of the audit report

Expresses the auditor's conclusions based on the audit.

Which of the following had the HIGHEST PERCENTAGE of audit deficiency found by the Center for Audit Quality?

Failure to gather sufficient competent evidence

True or False: Auditors should only communicate material fraud to those charged with governance

False

True or false: Auditing STANDARDS are the steps taken by the auditor during the course of audit to comply with GAAS.

False Right answer: Auditing PROCEDURES

Unmodified opinions can be given on the audit of the financials statements when

Financial statements fairly present the financial position

The expression of an opinion by the auditors is based on an audit in accordance with

GAAS

Auditors render an independent opinion on the financial statements prepared by ______.

Management

The appropriateness of estimates in the financial statements depends on ______.

Management judgements

An unintended consequence of the materiality standard is

Management might manipulate amounts to fall below the materiality level

Match each condition for fraud with the proper example: Pressure

Meet financial analysts' earnings estimates

Match the opinion with the criteria: Qualified

Misstatements are material

Match the opinion with the criteria: Adverse

Misstatements are material and pervasive

Auditors who do not fulfill their legal obligations to the SEC to report illegal acts are subject to

Monetary fines

What rationalization did Dennis Kozlowski use in the Tyco fraud?

My predecessors did it

Match each condition for fraud with the proper example: Rationalization

One-time request

How should unusual and unexpected relationships be identified?

Performing analytical procedures

Integral to due care and a critical component for auditors when evaluating management estimates and judgements is ________.

Professional skepticism

What is the purpose of auditing standards?

Provide a measure of audit quality and objectives to be achieved in the audit

The degree of responsibility that the auditor is taking with respect to the opinion they issue on the financial statements is determined by the ________.

Reporting standards

When should an auditor give an unmodified opinion?

Statements present fairly financial position, results of operations, and cash flows

COSO's analysis of financial statement fraud indicates that:

The CEO and/or CFO were involved in the majority of cases

Which of the following outlines the components of internal control?

The COSO Frameowork

When should an auditor give a MODIFIED opinion?

The financial statements are materially misstated

Dennis Kozlowski's rationalization for committing fraud at Tyco was

To keep up with the masters of the universe

The auditor's assessment of fair presentation depends on whether the information presented in the statements is classified and summarized in a reasonable manner

True

True or false: AS No. 15 describes audit evidence as all information, whether obtained by the audit procedures or other sources, that is used by the auditor to support conclusions and the audit opinion

True

True or false: Audit committee communications about estimates in the financial statements are based on their reasonableness.

True

An example of a direct effect illegal act is:

Violations of tax laws

The auditor's responsibility to provide reasonable assurance about the financial statements can be described as:

Whether the statements are free of material misstatements

The unintentional omission of a material amount in financial statements is referred to as

an error

Fieldwork standards relate to the quality of the _______.

audit

The period between the time before an engagement partner who steps down from an engagement can then become the engagement quality reviewer is referred to as the _______-______ period.

cooling-off

Fraud always entails a(n) ______ decision.

deliberate (Purposeful refers to an act; deliberate refers to a decision)

Private Securities Litigation Reform Act (PSLRA) of 1995

places additional requirements upon public companies registered with the SEC and their auditors when (1) the illegal act has a material effect on the financial statements (2) senior management and the board of directors have not taken appropriate remedial aciton (3) the failure to take remedial action is reasonably expected to warrant departure from a standard (i.e. unmodified audit report) or to warrant resignation

General standards relate to the quality of the _________ who perform the audit.

professionals

Auditors should plan and perform the audit to obtain ________ about whether the financial statements are free of material misstatement

reasonable assurance

Discussion with predecessor auditors about accounting and financial reporting differences with management are part of __________.

risk assessment

External audits are among _____ effective controls in detecting fraud

the least